The popular press is busy reassuring Americans that the wobble on Wall Street won’t cause them any trouble. Two major reasons are given:
First, Wall Street’s woes are traceable to subprime lending – and that, as we all know, is a containable problem. After all, said a report on MSN MONEY, the entire housing industry is only a US$1.5 trillion industry.
Only? That’s more than 10% of the entire economy. The GDP growth rate is only (officially) about 3%. A one-third cutback in the housing industry would mean negative growth in the economy – a recession. And it could be a long, deep recession.
“Housing to weaken even further,” says the Wall Street Journal.
The Washington Post adds that it is becoming hard to find a lender will give you a No-Money-Down mortgage.
Where does that leave the housing industry? D.R. Horton (NYSE:DHI), one of the biggest builders, announced its first quarterly loss in 15 years of doing business. Weyerhaeuser (NYSE:WY), a major supplier to the homebuilding industry, says its earnings are off 89%. And American Home Mortgage (NYSE:AHM), a major lender, has been cut down to a penny share; you could buy the shares last week at 69 cents. Better move fast; if the rumours are correct, it will soon cease trading.
The second reason given for why we shouldn’t worry is that overseas economies are strong and growing fast. They are buying more and more imports from the US, say the analysts. But the last time we looked, manufacturing was still shrinking in the United States. How can a declining sector prevent a general decline in the economy?
The credit bubble has been a fantastic boon to foreign manufacturers. Capital was never easier to get. And Americans would buy any and all the junk they produced. Now, these same producers are America’s competitors. And when the slump in the Unites States forces consumers to curtail their buying, foreign manufacturers will have to quickly refocus on their own domestic markets…competing with products provided by US exporters.
The US has neglected capital investment…and the manufacturing sector generally…for a quarter century. How will it now export its way out of a recession? Beats us…
The Daily Reckoning Australia